PARTNERSHIP OPERATION

1. On January 1, 2020, A, B and C formed ABC Partnership with total agreed capitalization of
P1,000,000. The capital interest ratio of the ABC Partnership is 5:1:4 while the profit or loss ratio
is 3:2:5, respectively for A, B and C.

During 2020, A and B made additional investments of P200,000 and P500,000, respectively. At the
end of 2020, B and C made drawings of P300,000 and P100,000, respectively. On December 31,
2020, the capital balance of B is reported at P200,000.

1. What is the net income or net loss of ABC Partnership for the year ended December 31,
2020?
a. 500,000 loss
b. 1,000,000 loss
c. 800,000 income
d. 1,200,000 income

2. What is the capital balance of C on December 31, 2020?

a. 150,000
b. 50,000
c. 200,000
d. 250,000

2. Partners A, B, and C already established a business and they want to distribute the profits or losses
that were generated at the end of the year. The capital accounts during the year were as follows:

A B C
January 1 135,000 180,000 75,000
March 1, withdrawal - (36,000) -
April 1, investment - - 30,000
May 1, investment 72,000 - -
June 1, investment - 27,000 -
August 1, withdrawal - - (9,000)
October 1, withdrawal (54,000) - -
December 1, investment - 18,000 -

The following were agreed on how to distribute the profits and losses:
● Annual salaries were P600,000 to A, P540,000 to B, and P750,000 to C
● Interest was 15% of the ending capital balance in excess of P140,000
● C receives a bonus of 20% of net income after deducting the bonus and the salaries
● Remainder will be distributed equally
● At the end of the year, there was a credit balance in the income summary account in the amount
of P1,740,000

1. What is the share in the net income of Partner B?

a. 600,450
b. 593,100
c. 494,250
d. 585,750

2. What is the capital at the end of the year of Partner C?

a. 792,900
b. 96,000
c. 899,100
d. 750,900
3. A and B formed a partnership on January 1, 2020 by contributing capital of P525,000 and P75,000
respectively and agreed to share profits and losses 70:30 respectively also.
The following were the profit or loss agreement distribution:
● Monthly salaries for partner B in the amount of P10,000
● Interest of 5% of the partners’ beginning capital
● Bonus to partner B, 20% of net income before deducting salaries, interest, and bonus
● Remainder will be divided using their profit or loss ratio
● At December 31, 2020, the partnership generated a net income of P96,000 after deducting
salaries, interest, and bonus

1. What is the amount of the share in the net income of Partner A?

a. 93,450
b. 213,450
c. 154,950
d. 67,200

2. What is the amount of the share in the net income of Partner B?

a. 150,275
b. 214,050
c. 152,550
d. 210,300

4. Partners Samson and Delilah have profit and loss agreement with the following provisions: salaries
of P90,000 and P135,000 for Samson and Delilah, respectively: a bonus to Samson of 10% of net
income after salaries; and interest of 10% on average capital balances of P60,000 and P105,000 for
Samson and Delilah, respectively. One-third of any remaining profits will be allocated to Samson
and the balance to Delilah.
If the partnership had net income of P66,000, how much should be allocated to Partner
Samson, assuming that the provisions of the profit and loss agreement are ranked by order of
priority starting with 1) salaries, 2) interest, 3) bonus and up to the extent of the ranking
only?
a. 39,600
b. 37,500
c. 36,000
d. 26,400

EXERCISES
1. If the agreement provides for the division of profits only. losses should be divided:
a. Equally
b. ​According to profit ratio
c. According to original capital ratio
d. According to average capital ratio

2. Which of the following is not an expense of a partnership?

I. Salary of employees of the partnership
II. Salaries to partners of a partnership
III Interest on loan from partners to the partnership
IV Interest on partners’ capital account balances

a. I and III c. II and III

b. II and IV d. I and II

3. If the agreement provides for the division of losses only. Profits should be divided:
a. Equally
b. According to beginning capital ratio
 c. ​According to original capital ratio
d. According to average capital ratio

4. Salaries to partners of a partnership typically should be accounted for as:

a. A devise for sharing income
b. An Operating expense of the partnership
c. Drawings by the partners from the partnership
d. Reductions of the partners’ capital account balances

5. Henry is trying to decide whether to accept a salary of P180,000 or a salary of P75,000 plus a bonus of
20% of net income after the bonus as a means of allocating profit among the partners. What amount of
income would be necessary so that Henry would consider the choices to be equal?
a. P105,000 c. P420,000
b. P255,000 d. ​P630,000

6. Partners Bill, May and Emily have the following profit and loss agreement:
▪ Bill and May receive salaries of P80,000 each.
▪ Emily gets a bonus of 10 percent of net income after salaries and bonus (the bonus is zero if salaries
exhaust net income)
▪ Remaining profits are shared by Bill, May and Emily in the following ratios respectively: 3:4:3.
The partnership had a net income of P182,000. How much should be allocated to Emily?
a. P6,600 c. P2,000
b. P20,600 d. P8,000

7. O and M formed the PAD Partnership several years ago. Capital account balances on December 31,
2020, after closing were as follows:
O P500,000
M 280,000

The partnership agreement provides O with an annual salary of P10,000 plus a bonus of 5% of
partnership net income for managing the business. M is provided an annual salary of P15,000 with no
bonus. The remainder is shared evenly. Partnership net income for 2020 was P30,000. O and M each
invested additional P5,000 during the year to finance a special purchase. Year- end drawing account
balances were P15,000 for O, and P10,000 for M. The capital balances of O and M on ​January 1, 2020
were:

a. P503,250 and P291,750. c. P505,000 and P290,000.

b. P486,750 and P258,250. d. P480,000 and P310,000.